BY GREGORY DL MORRIS
Last year, wind energy became the No. 1 source of new U.S. electricity generating capacity for the first time, providing some 42 percent of all new generating capacity, according to the American Wind Energy Association (AWEA). Solar seems to get more attention, unless there is some not-in-my-backyard or off-my-shore protest against a wind proposal. But not only is wind the fastest growing new source for power in the country, it is also a burgeoning insurance market.
Even in insurance, solar seems to grab the headlines, with Chinese panel makers going bust. (See the first article in this series in the May issue.) Wind is on a different footing, with global corporations such as General Electric and Siemens being among the top manufacturers. The other major difference, said Mike Perron, senior vice president at Willis, is the physical nature of the power generation.
"Solar panels are small and light, and relatively inexpensive. Wind-energy components are very large -- a single blade can be as long as half of a football field, and the towers many hundreds of feet high. You've got big, expensive machinery moving very fast far from the ground. That is a bigger insurance risk because of the size and speed."
Still, Perron said, as the wind industry has matured, so has the insurance market supporting it. "Over the past 10 years, the market has become more sophisticated and much more competitive. When Willis started working in this area, it was sometimes a challenge to place coverage. Now the market is more familiar with the risks."
There is now reciprocal growth acceleration, with components and projects getting bigger, but underwriters becoming more comfortable and knowledgeable of the exposures. The fourth quarter of 2012 saw 8,385 megawatts of wind power capacity installed, according to the AWEA.
That addition brought the total 2012 installations to 13,131 megawatts, and the U.S. wind industry now totals 60,007 megawatts of cumulative wind capacity, generated by more than 45,100 turbines.
"Today, the U.S. represents not only a large market for wind power capacity installations, but also a growing market for American manufacturing. More than 550 manufacturing facilities across 44 statesmake components for wind turbines," the AWEA said.
Perron said that "part of the reason that the market has become more competitive is that insurers have realized that they have protection from the original manufacturers' warranties." Again, a stark contrast to the solar market, where coverage to backstop panel-makers' warranties has been a very hot area. "Over the next few years," Perron added, "a lot of wind machines will come off warranty. It will be interesting to see how the market deals with that."
The AWEA is already addressing that issue. "Operationally, the U.S. wind energy industry has installed more than 50,000 megawatts of wind projects," said the association, "and has accumulated millions of hours of wind turbine operation and maintenance experience. By the end of 2012, over $50 billion worth of wind installations in the U.S. will be out of warranty, leaving the owner with the financial risk of providing cost-effective operation and maintenance."
In the next two decades, the United States will require more than 100,000 additional wind turbines to supply 20 percent of the country's electricity. The industry needs to develop, document, and share best practices and lessons-learned for operating wind projects at peak productivity and profitably, for decades to come. AWEA released the new Operation and Maintenance Recommended Practices at the AWEA Operations, Maintenance and Reliability Workshop in La Jolla, Calif., in January.
One of the specialty firms active in renewables, especially wind, is GCube Insurance Services. It is a managing general agent on behalf of more than a dozen Lloyd's syndicates, and recently Munich Re has also joined the fold as an underwriter. "We founded the company about seven years ago," said John McLane, its president. "Lloyd's provided all of our capacity until last year, when Munich came in, they currently provide about 7 percent, but we are excited to have them participate because this type of risk is right in their wheelhouse." Headquarters for GCube is in London, with an office in Newport Beach, Calif., close to the wind and solar concentrations in the Southwest.
McLane said that GCube places $135 million in premiums a year, and of that, wind coverage represents about 60 percent. Everything about wind energy is big, he said, not just the components. "Many facilities are owned by the large generating companies. Next Era, based in Florida, is the largest wind owner in the country, with about a quarter of total capacity."
Not surprisingly for a competitive market, McLane said, there is no capacity constraint in placing coverage; neither is there any shortage of financing for backers to get projects funded and built. The challenge, he said, is siting, and not just because homeowners might want wind turbines erected out of sight.
"The wind tends to blow steadily and strongly in remote locations, so transmission is a challenge. So is construction. Erecting towers, and installing huge, heavy nacelles [housing covers] and blades in a high-wind environment is a big challenge."
Even once a wind farm is on line, wind itself can be a risk. "We have had projects suffer wind damage," said McLane, "especially tornadoes." All the turbines have monitors on rotor speed, and will rotate the blades so the wind just goes past them if there is a danger of them spinning too fast. Other common perils are lightning, gear failure, and fires in the nacelles. "Like any big machine, you have simple mechanical breakdowns," he said. "The most frequent loss is a failure in the gear box. These are low severity losses, but higher frequency."
While the size of wind components makes them big by renewable standards, they are still not as large as conventional power. "A big wind project is $500 million," said McLane. "You cannot build a coal-fired plant for that much. So deductibles tend to be lower for wind projects than for conventional projects." The same scale pertains to losses. "A typical gas turbine loss will run $15 million to $30 million in property damage and business interruption. A big loss on a wind project will be $5 million to $10 million."
The biggest issue, said McLane, is serial loss, where an entire batch or run of components may be in question. "Policies have sliding scales," he said. "We cover the first or second or even third loss, but then there is a declining scale for the fifth or tenth. At that point, the issue really has to go back to the manufacturer."
And that is where the warranty issue resurfaces. "Wind operators don't have to pay for the wind, but they do have to pay for the stuff that the wind breaks," said McLane. "Operators expect certain life out of the blades and gear boxes, and some calculate replacement into their capital or operating forecasts."
For all the advances in size and risk management in the United States, the offshore frontier has yet to be realized. Offshore projects have been successful worldwide, especially in Europe, and underwriters are casting their eyes to the United States as the next big growth region for wet feet.
In its annual International Wind Energy Development World Market Update released in March, Navigant Research found that the penetration of wind power in the world's electricity supply has reached 2.62 percent, with more than 285 gigawatts installed globally. There were 45 gigawatts of new capacity added in 2012, including 1.1 gigawatts from offshore wind. Navigant further found that the United States surpassed China as the largest market in terms of new installations in 2012, while Europe lost its position as the largest world region in terms of new installations.
With the worldwide addition of 44,951 megawatts in new installations in 2012, global wind power capacity grew to around 285,700 megawatts, an increase in the total wind power installation base of 18.6 percent, according to Navigant. Market growth year-over-year in 2012, though a modest 7.8 percent, was still higher than in 2011. Average annual growth for the past five years has been 17.8 percent, achieved during the aftermath of the 2008 financial crisis, with traditionally large markets for wind power in economic recession in America and Europe.
In a notable contrast to the solar power sector, which is dominated by Chinese panel makers, American, European and Indian wind-turbine manufacturers pushed Chinese manufacturers out of the Top 5 in 2012, according to Navigant.
Looking ahead, Navigant forecasts that a further 241,620 megawatts will be added through 2017, 10 percent less than the forecast made in 2011. The lowering of the forecast growth rate is mainly due to a projected slowdown in wind turbine sales in 2013 and the next few years. The average growth rate for new installations from 2013 to 2017 is expected to be 5.1 percent, with a decrease of more than 10 percent in 2013, compared to 2012.
That decrease will be reflected in the U.S. market in 2013, as a result of 2012's last-minute one year extension of the federal production tax credit (PTC). The U.S. market will likely face additional political uncertainty when the PTC expires after 2013. Established European wind power markets, such as Spain and Italy, are expected to decline in coming years, while China, the world's largest wind market, will still be in transition from a period of breakneck growth to one of more stable development.
"Swiss Re has come to the conclusion that the shape of things to come in wind energy is offshore," said Andrew Norris, senior engineering underwriter, based in London. "The cost of development offshore is driving components bigger and projects bigger because of the economy of scale," he said. "That is where the highest output is."
The biggest offshore markets, said Norris, are Germany, Belgium, the Netherlands, and the U.K. "But all eyes are focused on the U.S. If that country goes offshore, the projects will be bigger and better than anywhere else in the world. There are many proposals, for the Carolinas, up and down the eastern seaboard as well as the Gulf of Mexico, even the Great Lakes."
In terms of policies, Norris recalled that a form called the Wellington Construction All Risk, known as WelCAR, was originally created for offshore oil and gas rigs in the early 2000s and quickly became standard. The WindCAR for offshore wind farms was derived from WelCAR and is becoming standard as well. Norris said it addresses serial loss, salvage, removal of wreck, cable laying, and other perils and exposures specific to both wind power and offshore operation.
"Onshore you talk rates in terms of per mil or per thousand, offshore you talk percentages," said Norris. "Offshore is a whole different cost structure. If you drop a spanner off an onshore tower, you just climb down and get it. You can't do that in several hundred feet of water. Everything has to be reckoned in terms of time and expense, marine support ships and personnel, and also in the context of weather."
The complexity of offshore wind projects appeals to Swiss Re and the few other carriers that participate as underwriters or reinsurers. "We have direct insurance and also re[insurance]," said Norris. "Either way, we see the future of wind offshore. It is a very promising market if you understand the risks and can lead a major project."
GREGORY DL MORRIS is a New York-based journalist with a specialty in energy. He can be reached at firstname.lastname@example.org.
June 1, 2013
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